Software Shakeout : Firms Seek Alliances in the Multimedia Frenzy
At an Electronic Arts board meeting in 1984, Executive Vice President Bing Gordon read this scribble, with a big circle around it, over a director’s shoulder: “60 days cash.” The young electronic games company was close to going under.
Now Electronic Arts is the largest player in an industry that is very, very trendy. Technological advances, falling computer prices and the rise of a generation at home with mice and joysticks have combined to create dizzying revenue forecasts for the consumer multimedia software industry.
The result has been a rash of mergers, investments and acquisitions as companies vie to stake their claims in the emerging market. In the last two days alone, EA announced plans to acquire Broderbund Software Inc., MCA said it has purchased a significant share in an Irvine-based interactive software publisher, and Virgin Interactive said it will offer a portion of its shares for sale to the public.
“Five or six years ago, interactive entertainment was considered by the rest of the entertainment industry to be a poor cousin,” says Robert Devereux, chief executive of Virgin Interactive. “The consolidation that is beginning to happen shows that this is a serious business and is taken as such by a number of serious players.”
In such a climate, a track record is a valuable commodity. In the dark days following the crash of the video game market in the early 1980s, when companies such as Time Warner and MCA were bailing out, Electronic Arts was “underpaying our employees in cash and giving them equity,” Gordon says. It was around then that Brian Fargo founded Interplay Productions, the firm best known for the game Battlechess and in which MCA said Thursday it had become a minority shareholder.
Ten years later, Electronic Arts has just purchased the biggest publisher in the exploding market of educational computer software, 31-year-old Fargo is lunching with MCA Chairman Lew Wasserman, and the still-fledgling multimedia industry is bracing for a consolidation that over the next year or two will probably leave fewer--but bigger--players at the head of a field now dominated by small firms.
While nearly every movie studio and publishing company--lured by the promise of limitless new markets on the mythic information superhighway--has started an interactive unit of its own in the last two years, analysts say success may be more likely to come from buying rather than starting to build so late in the game.
“These people have been successful, and they know how to create, publish and distribute interactive software,” says Lee Isgur, analyst at securities firm Volpe Welty. “These are qualities and skills which for these companies have meant hundreds of millions of dollars. MCA is showing they appreciate that.”
So companies like Fargo’s are getting the hard sell from all sorts of media and entertainment firms these days. Deals in the last 18 months include Sony’s purchase of the U.K.-based game developer Psygnosis, Viacom’s acquisition of Chicago-based Icomm Simulations, Hasbro and Block buster’s investments in Virgin Interactive, Paramount’s investments in Spectrum Holobyte and Knowledge Adventure, AT&T;’s investment in PF. Magic, Bertelsmann Music Group’s investment in Ion, and HBO and King World’s investment in Crystal Dynamics.
Says Fargo: “Interplay has been courted by virtually every major entertainment company in Hollywood.” But the young entrepreneur says he chose MCA because of its huge library of books, movies and records, and because he believes the firm will allow him to stay relatively independent. Terms weren’t disclosed, but analysts estimated MCA’s investment at $30 million to $40 million, and MCA has the option to increase its stake.
One reason for the interest in interactivity on the part of executives like Wasserman and MCA President Sid Sheinberg--both of whom showed up at the Consumer Electronics Show in Las Vegas last month to tour the interactive exhibits--is that once-nerdy “software” is being transformed by technology into something more akin to interactive motion pictures.
CD-ROMs--compact discs that can hold many times more information than a video game cartridge or computer floppy disk--are a fast-growing part of the software industry. With computer prices falling, Americans are expected to buy twice as many machines equipped with CD-ROM drives this year as last. The baby boomers’ computer-savvy children are driving demand for “edutainment” software like that produced by Broderbund and Knowledge Adventure.
And companies like 3D0 (in which both MCA and Electronic Arts are shareholders), Sega and Sony are all coming out with CD-ROM-based machines that hook up to the television.
But as multimedia goes more mainstream, it is already being forced to consolidate. Game and educational software publishers want to get into outlets like Costco and Wal-Mart, where computer geeks are a minority of customers. But such retailers won’t stock the hundreds of titles that specialty stores like Egghead Software have traditionally put on their shelves.
And production values are going up. The average cost to develop a game now is about $400,000. In a year, with market pressure to include more full-motion video and special effects, it is likely to be closer to $1 million.
The Electronic Arts-Broderbund merger “will create a more efficient competitor,” says Robert Kotick, chairman of Activision, a Los Angeles-based multimedia firm that last week raised $40 million to prepare for the coming shakeout. “But I think it’s necessary. We’re positioning ourselves so that we’ll be the consolidator rather than the consolidatee.”
While some smaller companies fear being squeezed out by giants, industry observers don’t think so. “I think we have to use the film and music model,” says analyst Isgur. “In the software industry, success is guaranteed by creativity, and that does not seem to be the monopoly of size.”
The Multimedia Explosion
Sales and projected sales of multimedia software for both personal computers and video games, in millions of units:
91:118.0
97:296.9
Figures do not include home finance, word processing or other productivity software for the home.
Source: Dataquest * LEAK IN DEAL?
Some lucky investors were buying up Broderbund shares at the right time. D3
